Can Market Crash Into ‘Dot-com Destruction’ Territory?

In this article:

• Is “dot-com destruction” ahead for this market?
• Peloton may be the canary in the coal mine
• “Cheap” tickers might not be so cheap

Is Peloton the canary in the coal mine heralding a repeat of “dot-com destruction” at the turn of the century?

Peloton was one of the most darling tickers for consumers and economists throughout pandemic lockdowns. Traders regularly took advantage of rallies in the stock – many were based on short squeezes.

Now, the darling is a dud in a new economic world where the stock market could crash.

Peloton went from sizzle to fizzle

Reported market value for Peloton was at $50 billion last year, but has fallen to about $4 billion this year. Earnings reports have been bad, and the stock traded above $13 today – below its IPO open of about $29. This darling has continued to fall from its all-time high of 167.42 in January, 2021.

Peloton may not be the only canary going silent similar to the dot-com destruction – dot-com bubble of 2000-2001. 

At the time, speculative investing and low interest rates triggered an overbought technology market with unjustified high prices. In 2001, high-valued stocks lost 100% of their value from the runup. The technology bubble burst, price action went back and forth, and then finally corrected.

Stocks in a similar loss scenario today may include:

• Wayfair (W)
• Beyond Meat (BYND)
• Netflix (NFLX)
• Chewy (CHWY)
• Roku (ROKU)
• DocuSign (DOCU)
• Teladoc (TDOC)
• Sea Limited (SE)
• Upwork (UPWK) 

These former pandemic darlings (now the dot-com stocks of 2022) aren’t the only stocks facing losses. Dot-com destruction is seeping into large-cap stocks which are leaders across the three major indexes.

This is highlighted in the Nasdaq technology leaders: Facebook, Apple, Amazon, Netflix, Google, Microsoft, Tesla, and Adobe.

High or low, where these new dot-com darlings go, so goes the Nasdaq.

Earnings destruction has hit hard in Facebook, Netflix, Google, and Amazon. And, despite strong earnings, Adobe has been cut by almost 50%.

Apple, Microsoft, and Tesla are left standing with a strong argument that if Apple falls, so falls the market overall.

Watching for extreme price action

Simpler’s traders are looking for a strong bounce-back to help stabilize price action, but none are holding their breath. Heavy selling continued Thursday across the board.

The Dow closed at 31,730.30 points to drop .33% (dropping 103.81 points on the day). The Nasdaq was positive today, closing at 11,370.96 points for a .06% rise while the S&P 500 stumbled .13% to 3,930.08 points.

The $TICK is also continually negative, which means more selling than buying, a falling volume spread, and steady selling throughout the day. Market concern is around the darling large-cap stocks that could fall and risk capitulation and margin calls.

Dot-com stocks of 2022 make up the heart of the Nasdaq. Without the heartbeat of these companies – and without buyers feeling confident to buy at new lows – the path of least resistance remains to the downside.

The canary stops singing in this scenario.

Any bulls “fighting ’till the last breath” and not believing the market can go lower should study the above list. And take a look at Apple:

Apple Watch: Is this “darling” headed lower?

Traders have held that Apple may be the lynchpin supporting the market and if it falls the market will spiral downward. Here’s action in Apple – Closed today at: 142.56. Apple grew from a pandemic low of 57.21 in March 2020, but is down from 182.01 since Jan. 1. Apple is a leader in the technology space and a high-value stock within the Dow, Nasdaq, and S&P 500.

Chasing a trend or playing the lotto?

Every trader should know that the stock market is tricky and risky. Those who want to push toward trading success must consider the risk, accept the risk, and learn how to manage risk as a trader.

Managing risk in a chaotic market might mean… taking on risk.

Simpler’s traders watch for setups of “lotto trades.” Like a lotto ticket there is potential for a big win, but the trader must be willing to lose all capital used in the trade. It is risky.

With prices heading lower, Simpler’s traders are keeping an eye on forces affecting the market. The goal is to frame what is happening to anticipate what may be around the corner. It can be risky.

After another big sell-off today, the overall market looks very weak. So, what’s the play? Think risk vs. reward.

Consider a lotto trade like the example from one of our online trading rooms this week. This is an “end of day” trade in the S&P 500.

The setup included a butterfly in the /ES to close out Wednesday. The risk was $150 with a potential of a $1,300 return. As a lotto trade, there was no guarantee the trade would work. After adding into the position with another $335, the trade closed at the end of the session for a $650 win.

Lotto trades can be big wins, but at the end of the day a win is a win in trading.

Learning small account strategies

Traders working through this market often are limited in trading funds and are looking for strategies to grow a small account.

Butterfly spreads allow traders who want to grow accounts of all sizes to manage risk while capitalizing on stock price movement.

Expensive assets like Amazon, Google, or Tesla are typically out of reach for traders with small accounts. A long call or even options on these tickers can price small accounts out of the game. And, in a volatile market, there is added risk and complication with pricier trades.

A butterfly options spread offers the opportunity to enter a trade for less capital in play. Butterfly strategies allow traders a path to trade at reasonable prices and still balance risk vs. reward. A butterfly spread can be used when trading during consolidation, breakouts, and trending charts.

Is this the time to add butterfly strategies to your trading plan?.

Note of caution: ‘cheap’ may not be so cheap

Some pundits and traders are targeting any stock that is “cheap” in this market, and the end result may not be what they expect.

Consider that something that is 20% down right now (and looking like a good buy), may be headed lower.

Remember the old saying that follows how the rising tide lifts all boats… but the outgoing tide takes them all out, too. If the market tide is still going out – headed down – a good buy today may be capsized by market movement.

There will likely be spurts of hope and optimism – bounces higher – but the expectation is further market losses until serious economic issues such as interest rate hikes and inflation are corralled. Consider cutting back on the size and number of trades to manage risk in this wild market.

Planning ahead for market volatility

The past few months have been filled with “doom and gloom” from Federal Reserve rate hikes, to interest rates, to economic supply chain issues, to war in Europe. 

All the data surrounding this market shows a continued downtrend. Simpler’s traders are sticking to technical analysis and charts to plan and execute trades in this market volatility.

Without a defined trend – up or down – trading has become more difficult. This can lead to a mental strain for traders.

Some traders stay flat while picking and choosing potential setups carefully, while others continue to day trade while managing risk – still staying careful inside the chaos.

No one knows what will happen in the next month, six months, or a year from now.

Today is the day for trading, and tomorrow the market will show what it’s doing all over again.